The PM, the mogul and the secret agenda

Tony Blair flies to California this week to address the annual get-together of News Corporation - led by one Rupert Murdoch. From Europe to broadcasting, terrorism to the direction of the nation, what is the truth about one of the most intriguing relationships in British public life?

From its manicured golf course with the breathtaking ocean view, to its pampering spa, the Pebble Beach resort in California should be an ideal spot to unwind. But the guests checking in next weekend - globetrotting politicians, hotshot analysts and senior executives from Rupert Murdoch's mighty News Corporation - are not here to relax. They will gather for one of the media empire's legendary conferences, an intellectual beauty parade before one of the most powerful men on the planet.

Careers will be made and broken this weekend, millions staked or withheld. The man described by a Downing Street spin doctor as the hidden member of Tony Blair's cabinet is looking to the future: and the decisions Murdoch makes could change the way you read, watch, consume and, perhaps, even vote. Which is why Blair is going.

The fortunes of New Labour and News Corp have always been entwined, but just how closely is now emerging. The Observer can reveal the extraordinary efforts Blair and Murdoch make to conceal their relationship, even arranging clandestine meetings abroad because the tycoon regarded Downing Street as too public. Also clear for the first time is the belief among senior aides that Blair would have held a referendum on the euro had it not been for the Eurosceptic Murdoch newspapers.

It can also be disclosed that News International's latest lobbying offensive is against the BBC's bid for a significant rise in its licence fee. Murdoch fears the above-inflation increase would give the corporation an unfair advantage in developing new markets.

But does Murdoch really wield the unhealthy influence his enemies claim, skewing the British political debate thanks to the sheer number of his media outlets - or is he just one among many voices, and one that, so News Corp insiders protest, is often ignored by the Government? And can Labour keep his support once Blair steps down?

Gnomic utterances from the tycoon last month, indicating that he could back either Gordon Brown or David Cameron at the next election, have only intensified the battle for his affections. Asked on US television yesterday what he thought of Cameron, the brutal retort was 'not much' - but while Brown is still ahead in his esteem, the tycoon has doubts about him as well. 'He's sending a signal, which is, "My vote is up for grabs and you've got to work for it",' says one ex-minister.

At Pebble Beach they will ponder the future of the media in a digital era - and the future of the planet, with former presidential candidate Al Gore screening his film on climate change.

But this is also about Blair's future, and ultimately New Labour's. His invitation is partly a personal tribute, a signal that Murdoch wants an 'enduring relationship' with Blair once he leaves Downing Street. 'Being a friend of Rupert's is a very valuable thing in America,' says one of Murdoch's intimates, who argues the media magnate will want to offer the departing premier a job.

Choosing Blair also, however, avoids having to invite, and therefore endorse, either Brown or Cameron... just yet. Because for all its fabled power, Murdoch's flagship newspaper is now almost as nervous as Labour about its choice.

The Sun's reputation depends on backing winners and, unsure which way the electorate is now swinging, it knows if it picks the loser next time, it may end up looking like a chump. 'People are beginning to question whether it's got the political clout it had. If you call this wrong then I think a lot of people will say, "It's now dead as a political force,"' says one former News International executive. The two sides teeing off in California are more evenly matched than they look.

It was Neil Kinnock - convinced the Sun's hostility cost him the 1992 election - who persuaded Blair to take the tabloid seriously. Within months of Blair's coronation as leader of the Labour Party, the carefully courted Murdoch was telling his editors this was 'someone you could imagine people voting for'.

His blessing matters not just because a man who owns a paper that reaches 42 per cent of the reading market should know what makes people tick. Chasing the Sun's endorsement in 1997 after decades of support for the Tories symbolised New Labour's coming of age.

'It was what a party wanting to be in government would do,' explains one architect of the New Labour project. 'It continues to have a symbolic importance that is not actually because of Murdoch, because it's a right-of-centre newspaper and modern politics is about building coalitions.' The Sun wouldn't back any party that had not first captured its millions of readers, and wasn't therefore likely to succeed: it doesn't make winners, it adopts them.

The irony is that Murdoch himself is not party political at all: he is, says the ex-executive, driven by individuals rather than parties. If there's one thing Rupert looks for in people, it's courage, gut instinct, being prepared to stand out from the crowd. One of the reasons he has such respect and affection for Blair is that he's in a minority of about one on Iraq and Rupes thinks he's right.

'What's really interesting is that Rupert doesn't have any respect for politicians who kowtow to his newspapers,' the executive said.

Nor does he respect intellectual lightweights, a category in which he currently places Cameron. Another well-placed News International source says all the Tory leader has managed so far is a 'smallish lead in the polls': he remains an unknown quantity, a view Murdoch reflected yesterday by dubbing Cameron bright but 'totally inexperienced'. The Tory leader's wealthy background may also be an issue - Murdoch's inner circle prefers self-made men.

By contrast Murdoch admires Brown's intellect, but fears his instincts for state regulation and redistributive taxes, and considers him over-cautious. 'He admires Gordon's work ethic, and he's seen as intellectually attractive,' says the source. 'Whether he's courageous or not, is not known. He has not grasped any nettles. And we don't know where he stands on Iraq.'

This matters: Blair's Pebble Beach pass is partly a salute to his support for the war. Murdoch believes fundamentally in strong defence and law and order, small government, and low taxes: he would only support a candidate sceptical on Europe, committed to the war on terror, and free market-orientated enough not to threaten his business interests.

In his book The Spin Doctor's Diary, Lance Price, Downing Street's former director of communications, portrayed a one-sided relationship hyper-sensitive to Murdoch's whims - including the suggestion that Blair bought the Sun's support in 2001 by promising not to rush into the euro. 'Whenever any really big decisions had to be taken, I had the impression that Murdoch was always looking over Blair's shoulder,' Price says. He recalls constantly 'rushing into the Home Office' because Sun headlines about rising crime or asylum chaos had upset Blair, and says he was left with 'the pretty clear impression' that discussions with the Murdoch camp had dictated the handling of the single currency.

Without that pressure, would Blair have held the euro referendum he wanted? 'I think if there hadn't been Murdoch there, he would have felt braver and more able to follow his instincts. It was certainly under consideration for early in the second term. The fact that there wasn't one is a credit to Rupert Murdoch rather than to anyone else,' Price said.

It is a drastic charge, that Murdoch altered the course of history and the economy. News International sources certainly confirm that Anji Hunter, then the Prime Minister's gatekeeper and key custodian of the Murdoch relationship - alongside Alastair Campbell, head of strategy, and chief of staff Jonathan Powell - clearly signalled in 2001 there would be no early referendum, as did the Chancellor's envoy, Ed Balls.

The foreign secretary, Robin Cook, was not in this loop. 'I always took the view that Tony Blair's real Europe minister was [Sun political editor] Trevor Kavanagh,' says Cook's then special adviser, David Clark.

Nonetheless, one former Cabinet minister close to the discussions argues the real problem was that the polls never moved to a clear majority for the euro: Blair simply realised he couldn't win.

Moreover, in 2001 the Sun was not demanding much for its support: it was clearly not going to back William Hague, the man it portrayed as a dead parrot.

In other areas Murdoch's pro-American, pro-Israeli, pro-military intervention stance on the war on terrorism is faithfully reflected in Downing Street. His close associate Irwin Stelzer, the economist viewed as Murdoch's public mouthpiece - although the relationship is actually rather looser - argued in an article last week that Israel must be allowed to 'finish the job' and attacked Iran and Syria for fuelling the conflict, a position Blair echoes publicly.

But that does not prove anything sinister: the view is consistent with positions Blair has taken in the past on Israel. And while News Corp is certainly voluble on media policy - it lobbied ministers six times during the 2003 Broadcasting Bill - so was Lord Birt, the Downing Street aide who formerly ran the BBC.

Nonetheless, Government insiders say James Murdoch - Rupert's son and heir apparent - has made clear he is 'very, very grumpy about BBC funding': News International is in touch with the office of Shaun Woodward, the broadcasting minister, to discuss it. It is particularly irritated by suggestions the BBC could develop a rival to Myspace, its lucrative social networking website. The Treasury is already said to be scanning the BBC bid with a 'very sceptical eye', with a decision due this autumn.

And doubts over the relationship are fuelled by the extraordinary secrecy surrounding it. When his visits to Number 10 began attracting embarrassing attention, Murdoch would slip through the back door: but eventually he resorted to meeting Blair abroad.

'Rupert has a specially adapted 727 which can get anywhere, so if he is wanting to see Blair he doesn't necessarily have to see Blair here,' confirms one News International source.

In fact, Blair meets Murdoch two or three times a year: there are more frequent contacts with Stelzer and with News International managing director Les Hinton. Then there are the myriad smaller connections: Campbell writes a column for The Times; Murdoch's publishing imprint, Harper Collins, is seeking the rights to Blair's memoirs.

Such constant dialogue, Price argues, ensures Murdoch rarely has to lobby directly: Labour already knows what he wants. And that leads to what another ex-Downing Street staffer calls 'the danger of self-censorship': ministers automatically rejecting anything likely to outrage his newspapers, without even having to be told. Will Brown and Cameron be strong enough to resist?

But it is the Sun that counts, and Brown takes nothing for granted. 'Gordon had more of an obssession personally [with Murdoch] than Tony Blair did,' says a former News International executive. 'I never saw any instance of Blair being particularly bothered himself, but I did see it with Gordon - "What would Rupert think of this, how is Rupert?"'

After Pebble Beach, there will be one more News Corp gathering before the next election. The race for the golden ticket has begun.

Who's who in pebble beach

HILLARY CLINTON

Who? New York senator and presidential hopeful

Why? Serious, glamorous and looking for political backing. And she brings her husband, Bill, into the bargain

The Murdoch verdict: His New York Post has been championing her. But he said yesterday he was likely to back Republican John McCain instead.

AL GORE

Who? Former Democratic presidential candidate

Why? To show his film on climate change - and liven up the debate over the next Democrat nominations

The Murdoch verdict: James Murdoch, Rupert's son, is so into green issues he's made BSkyB carbon-neutral, meaning it redresses the damage it does to the environment.

NEWT GINGRICH

Who? Former Republican speaker of the House

Why? Neocon pin-up; active in moves to impeach Clinton, which should make for lively dinner conversation with fellow guests